Reporting of Specified Foreign Financial Assets, 78594-78599 [2011-32254]
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Federal Register / Vol. 76, No. 243 / Monday, December 19, 2011 / Proposed Rules
Example 2. No Floor Price. The facts are
the same as in Example 1, except that the
Pre-Signing Date value is $.50, the Closing
Date value is $1.50, and there is no limitation
on the amount of additional cash that the T
shareholders may receive (that is, there is no
Floor Price). For purposes of determining
whether a proprietary interest in the target
corporation is preserved, the rules of
paragraph (e)(2)(vi)(B) of this section apply
because, pursuant to a binding contract, the
amount of cash to be exchanged for all the
proprietary interests in the target corporation
varies below a Ceiling Price of $1.20 but does
not vary above the Ceiling Price, the PreSigning Date value is less than the Ceiling
Price, and the value on the Closing Date
exceeds the Ceiling Price. Accordingly,
whether a proprietary interest is preserved is
determined as if the consideration that would
have been delivered at the Ceiling Price was
issued and valued based upon the Ceiling
Price. At the Ceiling Price, the T shareholders
would have received, in the aggregate, $40 of
cash and $60 of P stock. Therefore, the
transaction satisfies the continuity of interest
requirement.
Example 3. No Floor or Ceiling Price. (i)
Facts. On January 3 of year 1, P and T sign
a binding contract pursuant to which T will
be merged into P. Pursuant to the contract,
the T shareholders will receive $50 cash and
$50 of P stock based upon the P stock value
on the Closing Date. On January 2 of year 1,
the Pre-Signing Date, the value of the P stock
is $1 per share. On June 1 of year 1, when
the value of P stock is $5 per share, T merges
into P.
(ii) COI determined on the Closing Date.
For purposes of determining whether a
proprietary interest in the target corporation
is preserved, the rules of paragraph (e)(2)(vi)
of this section do not apply because the
contract does not provide for either a Floor
Price or a Ceiling Price. There is no Floor
Price because there is not a value below
which the amount of P stock will not vary.
There is no Ceiling Price because there is not
a value above which the amount of P stock
will not vary. Because the transaction does
not satisfy the requirements of paragraph
(e)(2)(vi) of this section and does not satisfy
the definition of fixed consideration, the
consideration will be valued on the Closing
Date. The transaction satisfies the continuity
of interest requirement because the T
shareholders receive, in the aggregate, $50
cash and $50 of P stock.
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*
*
*
*
*
(9) Effective/Applicability date.
Paragraphs (e)(2)(vi) and (e)(2)(vii) are
proposed to apply to transactions
occurring on or after the date the
regulations are published as final
regulations in the Federal Register,
unless completed pursuant to a binding
agreement that was in effect
immediately before the date such final
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regulations are published and at all
times afterwards.
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2011–32079 Filed 12–16–11; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–130302–10]
RIN 1545–BJ69
Reporting of Specified Foreign
Financial Assets
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary
regulations.
AGENCY:
In the Rules and Regulations
section of this issue of the Federal
Register, the Internal Revenue Service is
issuing temporary regulations relating to
the requirement that individuals attach
a statement to their income tax return to
provide required information regarding
foreign financial assets in which they
have an interest. The text of the
temporary regulations also serves as the
text of these proposed regulations. This
notice of proposed rulemaking also
includes a proposed regulation setting
forth requirements for certain domestic
entities to report foreign financial assets
in the same manner as an individual.
DATES: Written or electronic comments
and requests for a public hearing must
be received by March 19, 2012.
Comments on the collection of
information should be received by
February 17, 2012.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–130302–10), Room
5205, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be handdelivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–130302–10),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC., or sent electronically,
via the Federal eRulemaking Portal at
https://www.regulations.gov (IRS REG–
130302–10).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Joseph S. Henderson, (202) 622–3880;
concerning submission of comments
and/or requests for a hearing, Richard.A.
SUMMARY:
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Hurst@irscounsel.treas.gov, (202) 622–
7180 (not a toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information
contained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget for
review in accordance with the
Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the
collection of information should be sent
to the Office of Management and
Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of
information should be received by
February 17, 2012. Comments are
specifically requested concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information;
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collection of information
may be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance and
purchase of service to provide
information.
The collection of information in these
proposed regulations is in §§ 1.6038D–
2 and 1.6038D–4. The collection of
information is mandatory with respect
to a specified person that has an interest
in specified foreign financial assets and
the value of those assets is more than
the applicable reporting threshold. The
respondents are U.S. citizens, U.S.
residents, certain nonresidents and, to
the extent provided in future
regulations, certain domestic entities.
The collection of information is satisfied
by filing Form 8938, ‘‘Statement of
Specified Foreign Financial Assets,’’
OMB No. 1545–2195, with the
respondent’s income tax return.
Estimated total annual reporting
burden: 378,000 hours.
Estimated annual burden per
respondent: 1 hour and 5 minutes.
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Estimated number of respondents:
350,000.
Estimated annual frequency of
responses: once.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential as required by 26 U.S.C.
6103.
Background
Section 6038D was enacted by section
511 of the Hiring Incentives to Restore
Employment (HIRE) Act, Public Law
111–147 (124 Stat. 71). Section 6038D(a)
requires an individual who holds any
interest in a specified foreign financial
asset during the taxable year to attach a
statement to that individual’s return of
tax imposed by subtitle A of the Internal
Revenue Code (Code) to report the
information identified in section
6038D(c), if the aggregate value of the
specified foreign financial assets in
which the individual holds an interest
exceeds $50,000 for the taxable year, or
such higher dollar amount as the
Secretary may prescribe.
Section 6038D(f) provides that, to the
extent provided by the Secretary in
regulations or other guidance, section
6038D shall apply to any domestic
entity which is formed of availed of for
purposes of holding, directly or
indirectly, specified foreign financial
assets, in the same manner as if the
entity were an individual.
Temporary regulations in the Rules
and Regulations section of this issue of
the Federal Register contain
amendments to the Income Tax
Regulations (26 CFR part 1) providing
guidance to individuals required to
report specified foreign financial assets
with their annual return pursuant to
section 6038D of the Code. The text of
those regulations also serves as the text
of the regulations contained in this
document that are proposed by crossreference to the temporary regulations,
that is §§ 1.6038D–0 through 1.6038D–5,
§ 1.6038D–7, and § 1.6038D–8. The
preamble to the temporary regulations
explains the amendments added by the
temporary regulations.
This document also contains a
proposed amendment to the Income Tax
Regulations (26 CFR part 1) that sets out
the conditions under which a domestic
entity will be considered a ‘‘specified
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domestic entity.’’ A domestic entity that
is a specified domestic entity pursuant
to Prop. Reg. § 1.6038D–6 is required to
report specified foreign financial assets
in which it holds an interest.
Explanation of Provisions
1. Application of Section 6038D to
Domestic Entities
Under the proposed regulations,
domestic entities that are subject to the
reporting requirements of section 6038D
are designated as specified domestic
entities and include certain domestic
corporations, domestic partnerships,
and trusts described in section
7701(a)(30)(E), generally referred to as
domestic trusts for purposes of this
explanation. Specified domestic entities
do not include domestic estates.
A. Domestic Corporations and
Partnerships
For a domestic corporation or
partnership to be considered a specified
domestic entity, it must satisfy three
conditions. First, the domestic
corporation or domestic partnership
must have an interest in specified
foreign financial assets (other than
assets excepted from reporting as
provided in § 1.6038D–7T) with an
aggregate value exceeding the reporting
threshold in § 1.6038D–2T(a)(1).
Second, it must be closely held by a
specified individual (as defined in
§ 1.6038D–1T(a)(2)). A domestic
corporation is closely held if a specified
individual owns at least 80 percent of
the corporation’s stock (by vote or
value) on the last day of the
corporation’s taxable year. A domestic
partnership is closely held if a specified
individual owns at least 80 percent of
the capital or profits interest in the
partnership on the last day of its taxable
year. Direct, indirect, and constructive
ownership rules apply in determining
whether the corporation or partnership
is closely held for this purpose.
Finally, a domestic corporation or
partnership must also meet either of the
following two conditions:
(A) At least 50 percent of the
corporation’s or partnership’s gross
income for the taxable year is passive
income or at least 50 percent of the
assets held by the corporation or
partnership at any time during the
taxable year are assets that produce or
are held for the production of passive
income; or
(B) At least 10 percent of the
corporation’s or partnership’s gross
income for the taxable year is passive
income or at least 10 percent of the
assets held by the corporation or
partnership at any time during the
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taxable year are assets that produce or
are held for the production of passive
income, and the corporation or
partnership is formed or availed of by a
specified individual with a principal
purpose of avoiding the reporting
obligations under section 6038D. The
determination of whether a corporation
or partnership is formed or availed of
with a principal purpose of avoiding
reporting under section 6038D takes
into account all facts and circumstances.
Two different aggregation rules apply
for purposes of determining whether a
domestic corporation or domestic
partnership is a specified domestic
entity. First, in determining whether a
domestic corporation or domestic
partnership meets the reporting
thresholds in § 1.6038D–2T(a)(1),
domestic corporations and domestic
partnerships that are closely held by the
same specified individual are treated as
a single entity. Second, for purposes of
determining whether a corporation or
partnership meets the passive income or
asset test, domestic corporations and
domestic partnerships that are closely
held by the same individual and that are
connected through stock or partnership
interest ownership with a common
parent corporation or partnership are
treated as a single entity.
The determination of whether a
corporation or partnership is a specified
domestic entity is made annually for
each taxable year of such corporation or
partnership.
B. Domestic Trusts
A domestic trust is considered a
specified domestic entity if it has an
interest in specified foreign financial
assets (other than assets excepted from
reporting as provided in § 1.6038D–7T)
with an aggregate value exceeding the
reporting threshold in § 1.6038D–
2T(a)(1) and one or more specified
persons as current beneficiaries. For
purposes of section 6038D, a current
beneficiary is any person who, during
the taxable year, is entitled to, or at the
discretion of any person may receive, a
distribution from the principal or
income of the trust (determined without
regard to any power of appointment to
the extent that such power remains
unexercised at the end of the taxable
year). As discussed in section 2 of this
explanation, certain domestic trusts are
not specified domestic entities.
The determination of whether a
domestic trust is a specified domestic
entity is made annually for each taxable
year of such trust.
2. Excepted Specified Domestic Entities
A domestic entity is not considered to
be a specified domestic entity if it is
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described in section 1473(3) and the
regulations as excepted from the
definition of the term ‘‘specified United
States person’’. This exception does not
apply to any trust that is exempt from
tax under section 664(c).
A domestic trust is not considered a
specified domestic entity if the trustee
or executor is a bank, financial
institution, or domestic corporation that
is subject to certain examination,
oversight or registration requirements,
has supervisory authority over or
fiduciary obligations with regard to the
trust’s specified foreign financial assets,
and files income tax returns and
information returns on behalf of the
trust. In addition, a domestic trust or
any portion of the trust that is treated as
owned by one or more specified persons
under sections 671 through 679 and the
regulations issued under those sections
is not considered to be a specified
domestic entity.
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Proposed Effective Date
Section 1.6083D–6 is proposed to
apply to taxable years beginning after
December 31, 2011.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
has also been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations.
It is hereby certified that the
collection of information in this notice
of proposed rulemaking will not have a
significant economic impact on a
substantial number of small entities
within the meaning of section 601(6) of
the Regulatory Flexibility Act (5 U.S.C.
chapter 6). Small entities generally hold
specified foreign financial assets (that is,
financial accounts, stocks, securities,
financial instruments, contracts, or
interests in foreign entities) for use in
their trade or business and therefore
generally would not have a filing
requirement. The burden is further
reduced because small entities that do
hold specified foreign financial assets
generally will be excepted from
reporting such assets under these
proposed rules if the assets are reported
on one or more of the following forms:
Form 3520, ‘‘Annual Return To Report
Transactions With Foreign Trusts and
Receipt of Certain Foreign Gifts‘‘; Form
3520–A, ‘‘Annual Information Return of
Foreign Trust With a U.S. Owner’’;
Form 5471, ‘‘Information Return of U.S.
Persons With Respect To Certain
Foreign Corporations’’; Form 8621,
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‘‘Return by a Shareholder of a Passive
Foreign Investment Company or a
Qualified Electing Fund’’; Form 8865,
‘‘Return of U.S. Persons With Respect to
Certain Foreign Partnerships’’; or Form
8891, ‘‘U.S. Information Return for
Beneficiaries of Certain Canadian
Registered Retirement Plans.’’
Therefore, a Regulatory Flexibility
Analysis under the Regulatory
Flexibility Act is not required. Pursuant
to section 7805(f) of the Code, this
regulation has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small businesses. The
Internal Revenue Service invites the
public to comment on this certification.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written (a signed original and eight (8)
copies) or electronic comments that are
submitted timely to the IRS. The
Department of the Treasury and the
Internal Revenue Service request
comments on all aspects of the proposed
regulations. All comments will be
available for public inspection and
copying. A public hearing will be
scheduled if requested in writing by any
person that timely submits written
comments. If a public hearing is
scheduled, notice of the date, time, and
place for the public hearing will be
published in the Federal Register.
Section 1.6038D–2 also issued under 26
U.S.C. 6038D
Section 1.6038D–3 also issued under 26
U.S.C. 6038D
Section 1.6038D–4 also issued under 26
U.S.C. 6038D
Section 1.6038D–5 also issued under 26
U.S.C. 6038D
Section 1.6038D–6 also issued under 26
U.S.C. 6038D
Section 1.6038D–7 also issued under 26
U.S.C. 6038D
Section 1.6038D–8 also issued under 26
U.S.C. 6038D* * *
Par. 2. Section 1.6038D–0 is added to
read as follows:
§ 1.6038D–0
provisions.
Outline of regulation
The text of proposed § 1.6038D–0 is
the same as the text of § 1.6038D–0T
published elsewhere in this issue of the
Federal Register.
Par. 3. Section 1.6038D–1 is added to
read as follows:
§ 1.6038D–1 Reporting with respect to
specified foreign financial assets, definition
of terms.
The text of proposed § 1.6038D–1 is
the same as the text of paragraphs (a)
and (b) in § 1.6038D–1T published
elsewhere in this issue of the Federal
Register.
Par. 4 Section 1.6038D–2 is added to
read as follows:
§ 1.6038D–2 Requirement to report
specified foreign financial assets.
Drafting Information
The principal author of these
proposed regulations is Joseph S.
Henderson, Office of Associate Chief
Counsel (International). However, other
personnel from the Internal Revenue
Service and the Department of the
Treasury participated in their
development.
The text of proposed § 1.6038D–2 is
the same as the text of paragraphs (a)
through (e) in § 1.6038D–2T published
elsewhere in this issue of the Federal
Register.
Par. 5 Section 1.6038D–3 is added to
read as follows:
§ 1.6038D–3
assets.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.6038D–1 also issued under 26
U.S.C. 6038D
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The text of proposed § 1.6038D–3 is
the same as the text of paragraphs (a)
through (e) in § 1.6038D–3T published
elsewhere in this issue of the Federal
Register.
Par. 6. Section 1.6038D–4 is added to
read as follows:
§ 1.6038D–4
reported.
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
Specified foreign financial
Information required to be
The text of proposed § 1.6038D–4 is
the same as the text of paragraphs (a)
and (b) in § 1.6038D–4T published
elsewhere in this issue of the Federal
Register.
Par. 7. Section 1.6038D–5 is added to
read as follows:
§ 1.6038D–5
Valuation guidelines.
The text of proposed § 1.6038D–5 is
the same as the text of paragraphs (a)
through (g) in § 1.6038D–5T published
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elsewhere in this issue of the Federal
Register.
Par. 8. Section 1.6038D–6 is added to
read as follows:
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§ 1.6038D–6
Specified domestic entities.
(a) Specified domestic entity. A
specified domestic entity is a domestic
corporation, a domestic partnership, or
a trust described in section
7701(a)(30)(E), if such corporation,
partnership, or trust is formed or availed
of for purposes of holding, directly or
indirectly, specified foreign financial
assets. Whether a domestic corporation,
a domestic partnership, or a trust
described in section 7701(a)(30)(E) is a
specified domestic entity is determined
annually.
(b) Corporations and partnerships—
(1) Formed or availed of. Except as
otherwise provided in paragraph (d) of
this section, a domestic corporation or
a domestic partnership is formed or
availed of for purposes of holding,
directly or indirectly, specified foreign
financial assets if and only if—
(i) The corporation or partnership has
an interest in specified foreign financial
assets (other than assets excepted from
reporting as provided in § 1.6038D–7T)
with an aggregate value exceeding the
reporting threshold in § 1.6038D–
2T(a)(1);
(ii) The corporation or partnership is
closely held by a specified individual as
determined under paragraph (b)(3) of
this section; and
(iii) One of the following two
conditions is satisfied:
(A) At least 50 percent of the
corporation’s or partnership’s gross
income for the taxable year is passive
income or at least 50 percent of the
assets held by the corporation or
partnership at any time during the
taxable year are assets that produce or
are held for the production of passive
income; or
(B)(1) At least 10 percent of the
corporation’s or partnership’s gross
income for the taxable year is passive
income or at least 10 percent of the
assets held by the corporation or
partnership at any time during the
taxable year are assets that produce or
are held for the production of passive
income, and
(2) The corporation or partnership is
formed or availed of by the specified
individual identified in paragraphs
(b)(1)(ii) and (b)(3) of this section with
a principal purpose of avoiding the
reporting obligations under section
6038D. For purposes of determining
whether a corporation or partnership is
formed or availed of with a principal
purpose of avoiding reporting under
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section 6038D, all facts and
circumstances are taken into account.
(2) Passive income. For purposes of
paragraph (b) of this section, passive
income means the portion of gross
income that consists of—
(i) Dividends;
(ii) Interest;
(iii) Rents and royalties, other than
rents and royalties derived in the active
conduct of a trade or business
conducted by employees of the
corporation or partnership;
(iv) Annuities;
(v) The excess of gains over losses
from the sale or exchange of property
that gives rise to passive income
described in paragraphs (b)(2)(i) through
(iv) of this section;
(vi) The excess of gains over losses
from transactions (including futures,
forward, and similar transactions) in
any commodity, but not including any
commodity hedging transaction
described in section 954(c)(5)(A)
determined by treating the corporation
or partnership as a controlled foreign
corporation;
(vii) The excess of foreign currency
gains over foreign currency losses (as
defined in section 988(b)) attributable to
any section 988 transaction; and
(viii) Net income from notional
principal contracts.
(3) Closely held—(i) Domestic
corporation. A domestic corporation is
closely held by a specified individual
for purposes of paragraph (b)(1)(ii) of
this section if at least 80 percent of the
total combined voting power of all
classes of stock of the corporation
entitled to vote, or at least 80 percent of
the total value of the stock of the
corporation, is owned, directly,
indirectly, or constructively, by one
specified individual on the last day of
the corporation’s taxable year.
(ii) Domestic partnership. A
partnership is closely held by a
specified individual for purposes of
paragraph (b)(1)(ii) of this section if at
least 80 percent of the capital or profits
interest in the partnership is held,
directly, indirectly, or constructively, by
one specified individual on the last day
of the partnership’s taxable year.
(iii) Constructive ownership. For
purposes of paragraphs (b)(1)(ii) and
(b)(3) of this section, section 267(c) and
(e)(3) apply for the purpose of
determining the interest of a specified
individual in a corporation or
partnership, except that section
267(c)(4) is applied as if the family of an
individual includes the spouses of the
individual’s family members.
(iv) Example. The following example
illustrates the application of paragraph
(b)(3) of this section:
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Example. (1) Facts. DC1 is a domestic
corporation the total value of the stock of
which is owned 60% by A, a specified
individual, 30% by B, a member of A’s
family for purposes of section 267(c)(2) who
is not a specified individual, and 10% by
FC1, a foreign corporation. DC1 owns 90% of
the total value of the stock of DC2, a domestic
corporation. FC2, a foreign corporation, owns
10% of DC2. Neither A nor B owns, directly,
indirectly, or constructively, any stock in
FC1 or FC2.
(2) Ownership determination. DC2 is
closely held by A within the meaning of
paragraphs (b)(1)(ii) and (b)(3) of this section
because A, a specified person, owns more
than 80% of its total value. A is considered
to own 81% of the total value of DC2 by
application of the rules of section 267(c) and
this section.
(4) Treatment of related corporations
and partnerships—(i) Determination of
reporting threshold. For purposes of
applying paragraph (b)(1)(i) of this
section and determining whether a
domestic corporation or domestic
partnership satisfies the reporting
threshold in § 1.6038D–2T(a)(1), all
domestic corporations and domestic
partnerships that have an interest in any
specified foreign financial asset and are
closely held by the same specified
individual as determined under
paragraphs (b)(1)(ii) and (b)(3) of this
section are treated as a single entity, and
each such related corporation or
partnership will be treated as owning
the specified foreign financial assets
held by all such related corporations or
partnerships.
(ii) Determination of passive income
and asset thresholds. For purposes of
applying the passive income and asset
thresholds of paragraph (b)(1)(iii) of this
section, all domestic corporations and
domestic partnerships that are closely
held by the same specified individual as
determined under paragraphs (b)(1)(ii)
and (b)(3) of this section and that are
connected through stock or partnership
interest ownership with a common
parent corporation or partnership (as
determined under this paragraph
(b)(4)(ii)) are treated as a single entity.
A domestic corporation or a domestic
partnership is considered connected
through stock or partnership interest
ownership with a common parent
corporation or partnership if stock
representing at least 80 percent of the
voting power or value of each such
corporation, or partnership interests
representing at least 80 percent of the
profits interests or capital interests of
the partnership, in each case other than
stock of or partnership interests in the
common parent, is owned by one or
more of the other connected
corporations, connected partnerships, or
the common parent. For purposes of
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applying paragraph (b)(1)(iii) of this
section, each member of a closely held
and connected group as determined
under this paragraph (b)(4)(ii) is treated
as owning the combined assets and
receiving the combined income of all
members of that group. For purposes of
the preceding sentence, any contract,
equity, or debt existing between
members of such a group, as well as any
items arising under or from such
contract, equity, or debt relevant to the
determination of the passive income
percentage under paragraph (b) of this
section, are eliminated.
(5) Examples. The following examples
illustrate the application of the rules of
paragraph (b) of this section:
Example 1. (1) Facts. L is a specified
individual. In Year X, L wholly owns DC1,
a domestic corporation, and also owns a 90%
capital interest in DP, a domestic
partnership. DC1 owns 80% of the sole class
of stock of DC2, a domestic corporation. DC1
has no assets other than its interest in DC2.
DC2’s only assets are assets that produce
passive income, with a maximum value in
Year X of $40,000 on October 12. DC2’s
assets are comprised in relevant part on
October 12, Year X, of $15,000 of specified
foreign financial assets. DP’s only assets are
assets that produce passive income and that
are specified foreign financial assets with a
maximum value of $90,000 on October 12,
Year X and have a value of $20,000 on
December 31, Year X. DC1 and DC2 do not
file a consolidated annual return.
(2) Determination of reporting threshold.
DC1, DC2, and DP are closely held by L for
purposes of applying paragraph (b)(1)(ii) and
(b)(3) of this section. Under § 1.6038D–3T,
DC2 and DP each has an interest in specified
foreign financial assets; DC1 does not have an
interest in specified foreign financial assets.
For purposes of applying paragraph (b)(1)(i)
of this section and § 1.6038D–2T(a)(1)—
(i) DC1. DC1 is not treated as a single entity
with DC2 and DP under paragraph (b)(4)(i) of
this section. As a result, DC1 does not satisfy
the reporting threshold of paragraph (b)(1)(i)
of this section; and
(ii) DC2 and DP. DC2 and DP are treated
as a single entity under paragraph (b)(4)(i) of
this section. Therefore, for purposes of
applying the reporting threshold of
§ 1.6038D–2T(a)(1), DC2 is considered as
owning in addition to its own assets the
assets of DP, and DP is considered as owning
in addition to its own assets the assets of
DC2. As a result, DC2 and DP each satisfies
the reporting threshold of § 1.6038D–2T(a)(1),
because the value of the specified foreign
financial assets each is considered as owning
under paragraph (b)(4)(i) of this section
exceeds $100,000 on October 12, Year X.
(3) Determination of passive income or
passive asset percentage—(i) DC1 and DC2.
DC1 and DC2 are treated as members of a
closely held and connected group of entities
under paragraph (b)(4)(ii) of this section,
because DC1 and DC2 are closely held by L,
and DC2 is connected with DC1 though
DC1’s ownership of stock of DC2
representing at least 80% of the voting power
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or value of DC2. As a result, DC1 and DC2
are considered a single entity for purposes of
applying paragraph (b)(1)(iii) of this
paragraph, and each of DC1 and DC2 is
considered as owning the combined assets,
and receiving the combined income, of both
DC1 and DC2 (under paragraph (b)(4)(ii) of
this section). Therefore, DC1 and DC2 each
satisfies the passive asset threshold of
paragraph (b)(1)(iii)(A) of this section.
(ii) DP. DP is not treated as a member of
the DC1 and DC2 closely held and connected
group of entities because DC1 and DP are not
owned by a common parent corporation or
partnership. Therefore, whether the passive
income or passive asset threshold of
paragraph (b)(1)(iii) of this section is met
with respect to DP is determined solely by
reference to DP’s separately earned passive
income and separately held passive assets.
DP has only passive assets on October 12,
Year X, and, therefore, satisfies paragraph
(b)(1)(iii)(A) of this section.
(4) Reporting requirements—(i) DC1. DC1
is not a specified domestic entity for Year X,
and is not required to file Form 8938,
because DC1 does not satisfy the reporting
threshold of paragraph (b)(1)(i) of this section
and § 1.6038D–2T(a)(1).
(ii) DC2 and DP. DC2 and DP are specified
domestic entities for Year X, because they
each meet the conditions of paragraph (b)(1)
of this section: Each is closely held by L, a
specified individual; each has an interest in
specified foreign financial assets with an
aggregate value exceeding the reporting
threshold of § 1.6038D–2T(a)(1); and each
satisfies the passive asset threshold. DC2 and
DP must each file Form 8938 for Year X to
report their respective specified foreign
financial assets and disclose their maximum
values as provided in § 1.6038D–4T.
Example 2. (1) Facts. The facts are the
same as in Example 1, except that DC2 also
has assets and income from a trade or
business. The income from such business is
not passive income and constitutes 60% of
the gross income generated by DC2 in Year
X. The assets attributable to such trade or
business constitute at least 60% of the value
of DC2’s assets at all times during Year X.
Assume that neither DC1 nor DC2 is formed
or availed of by L with a principal purpose
of avoiding the reporting obligations under
section 6038D.
(2) Determination of reporting threshold.
DC1, DC2, and DP are closely held by L for
purposes of applying paragraph (b)(1)(ii) and
(b)(3) of this section. Under § 1.6038D–3T,
DC2 and DP each has an interest in specified
foreign financial assets; DC1 does not have an
interest in specified foreign financial assets.
For purposes of applying paragraph (b)(1)(i)
of this section and § 1.6038D–2T(a)(1)—
(i) DC1. DC1 is not treated as a single entity
with DC2 and DP under paragraph (b)(4)(i) of
this section. As a result, DC1 does not satisfy
the reporting threshold of paragraph (b)(1)(i)
of this section; and
(ii) DC2 and DP. DC2 and DP are treated
as a single entity under paragraph (b)(4)(i) of
this section. Therefore, for purposes of
applying the reporting threshold of
§ 1.6038D–2T(a)(1), DC2 is considered as
owning in addition to its own assets the
assets of DP, and DP is considered as owning
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Fmt 4702
Sfmt 4702
in addition to its own assets the assets of
DC2. As a result, DC2 and DP each satisfies
the reporting threshold of § 1.6038D–2T(a)(1)
because the value of the specified foreign
financial assets each is considered as owning
under paragraph (b)(4)(i) of this section
exceeds $100,000 on October 12, Year X.
(3) Determination of passive income or
passive asset percentage—(i) DC1 and DC2.
DC1 and DC2 are treated as members of a
closely held and connected group of entities
under paragraph (b)(4)(ii) of this section,
because DC1 and DC2 are closely held by L,
and DC2 is connected with DC1 though
DC1’s ownership of stock of DC2
representing at least 80% of the voting power
or value of DC2. As a result, DC1 and DC2
are considered a single entity for purposes of
applying paragraph (b)(1)(iii) of this
paragraph, and each of DC1 and DC2 is
considered as owning the combined assets,
and receiving the combined income, of both
DC1 and DC2 (as determined under
paragraph (b)(4)(ii) of this section). DC1 and
DC2 do not have sufficient passive income or
passive assets to satisfy the thresholds of
paragraph (b)(1)(iii)(A) of this section. In
addition, because neither DC1 nor DC2 is
formed or availed of by L with a principal
purpose of avoiding the reporting obligations
under section 6038D, neither DC1 nor DC2
meets the conditions described in paragraph
(b)(1)(iii)(B) of this section.
(ii) DP. DP is not treated as a member of
the DC1 and DC2 closely held and connected
group of entities, because DC1 and DP are not
owned by a common parent corporation or
partnership. Therefore, whether the passive
income or asset threshold of paragraph
(b)(1)(iii) of this section is met with respect
to DP is determined solely by reference to
DP’s separately earned passive income and
separately held passive assets. DP has only
passive assets that are specified foreign
financial assets on October 12, Year X, and
satisfies paragraph (b)(1)(iii)(A) of this
section.
(4) Reporting requirements—(i) DC1. DC1
is not a specified domestic entity for Year X,
and is not required to file Form 8938,
because DC1 does not satisfy the reporting
threshold of paragraph (b)(1)(i) of this section
and § 1.6038D–2T(a)(1).
(ii) DC2. DC2 is not a specified domestic
entity for Year X, and is not required to file
Form 8938, because DC2 does not satisfy the
passive income or passive asset threshold of
paragraph (b)(1)(iii)(A) of this section and is
not formed or availed of with a principal
purpose of avoiding the reporting obligations
under section 6038D.
(iii) DP. DP is a specified domestic entity
for Year X because DP meets the conditions
of paragraph (b)(1) of this section: DP is
closely held by L, a specified individual; DP
has an interest in specified foreign financial
assets with an aggregate value exceeding the
reporting threshold of § 1.6038D–2T(a)(1);
and DP satisfies the passive asset threshold
of paragraph (b)(1)(iii)(A) of this section. DP
must file Form 8938 for Year X to report its
specified foreign financial assets and disclose
their maximum value as provided in
§ 1.6038D–4T.
(c) Domestic trusts. Except as
provided in paragraph (d) of this
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Federal Register / Vol. 76, No. 243 / Monday, December 19, 2011 / Proposed Rules
section, a trust described in section
7701(a)(30)(E) is a specified domestic
entity that is formed or availed of for
purposes of holding, directly or
indirectly, specified foreign financial
assets if and only if the trust—
(1) Has an interest in specified foreign
financial assets (other than assets
excepted from reporting as provided in
§ 1.6038D–7T) with an aggregate value
exceeding the reporting threshold in
§ 1.6038D–2T(a)(1), and
(2) Has one or more specified persons
as a current beneficiary. For purposes of
this paragraph (c)(2), the term current
beneficiary means, with respect to the
taxable year, any person who at any
time during such taxable year is entitled
to, or at the discretion of any person
may receive, a distribution from the
principal or income of the trust
(determined without regard to any
power of appointment to the extent that
such power remains unexercised at the
end of the taxable year).
(d) Excepted domestic entities. An
entity is not considered to be a specified
domestic entity if the entity is—
(1) Certain persons described in
section 1473(3). An entity, except for a
trust that is exempt from tax under
section 664(c), that is excepted from the
definition of the term ‘‘specified United
States person’’ under section 1473(3)
and the regulations issued under that
section;
(2) Certain domestic trusts. A trust
described in section 7701(a)(30)(E)
provided that the trustee of the trust—
(i) Has supervisory authority over or
fiduciary obligations with regard to the
specified foreign financial assets held by
the trust;
(ii) Timely files (including any
applicable extensions) annual returns
and information returns on behalf of the
trust; and
(iii) Is —
(A) A bank that is examined by the
Office of the Comptroller of the
Currency, the Board of Governors of the
Federal Reserve System, the Federal
Deposit Insurance Corporation, the
Office of Thrift Supervision, or the
National Credit Union Association;
(B) A financial institution that is
registered with and regulated or
examined by the Securities and
Exchange Commission; or
(C) A domestic corporation described
in section 1473(3)(A) or (B), and the
regulations issued under that section.
(3) Domestic trusts owned by one or
more specified persons. A trust
described in section 7701(a)(30)(E) to
the extent such trust or any portion
thereof is treated as owned by one or
more specified persons under sections
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18:38 Dec 16, 2011
Jkt 226001
671 through 679 and the regulations
issued under those sections.
(e) Effective/applicability dates. This
section applies to taxable years
beginning after December 31, 2011.
Par. 9. Section 1.6038D–7 is added to
read as follows:
§ 1.6038D–7 Exceptions from the reporting
of certain assets under Section 6038D.
The text of proposed § 1.6038D–7 is
the same as the text of paragraphs (a)
through (d) in § 1.6038D–7T published
elsewhere in this issue of the Federal
Register.
Par. 10. Section 1.6038D–8 is added
to read as follows:
§ 1.6038D–8
disclose.
Penalties for failure to
The text of proposed § 1.6038D–8 is
the same as the text of paragraphs (a)
through (g) in § 1.6038D–8T published
elsewhere in this issue of the Federal
Register.
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2011–32254 Filed 12–14–11; 4:15 pm]
BILLING CODE 4830–01–P
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Parts 9 and 122
[EPA–HQ–OW–2011–0188; FRL–9608–3]
RIN 2040–AF22
National Pollutant Discharge
Elimination System (NPDES)
Concentrated Animal Feeding
Operation (CAFO) Reporting Rule;
Extension of Comment Period
Environmental Protection
Agency (EPA).
ACTION: Proposed rule; extension of
public comment period.
AGENCY:
On October 21, 2011 (76 FR
65431) (FRL–9481–7) EPA published a
proposed rule entitled, National
Pollutant Discharge Elimination System
(NPDES) Concentrated Animal Feeding
Operation (CAFO) Reporting Rule. As
initially published in the Federal
Register, written comments on the
proposal were to be submitted to EPA
on or before December 20, 2011 (a 60day public comment period). Since
publication, EPA has received several
requests for additional time to submit
comments. Therefore, the public
comment period is being extended for
30 days and will now end on January
19, 2012.
DATES: Comments may be submitted
until January 19, 2012.
SUMMARY:
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78599
ADDRESSES:
Comments: Submit your comments,
identified by Docket ID No. EPA–HQ–
OW–2011–0188, by one of the following
methods: https://www.regulations.gov:
Follow the on-line instructions for
submitting comments.
Email: ow-docket@epa.gov, Attention
Docket ID No. EPA–HQ–OW–2011–
0188.
Fax: (202) 566–9744.
Mail: Water Docket, Environmental
Protection Agency, Mailcode: 28221T,
Attention Docket ID No. EPA–HQ–OW–
2011–0188, 1200 Pennsylvania Ave.
NW., Washington, DC 20460. In
addition, please mail a copy of your
comments on the information collection
provisions to the Office of Information
and Regulatory Affairs, Office of
Management and Budget (OMB), Attn:
Desk Officer for EPA, 725 17th St. NW.,
Washington, DC 20503.
Hand Delivery: EPA Docket Center,
EPA West, Room 3334, 1301
Constitution Avenue NW., Washington,
DC, Attention Docket ID No. EPA–HQ–
OW–2011–0188. Such deliveries are
accepted only during the Docket
Center’s normal hours of operation, and
special arrangements should be made
for deliveries of boxed information.
Instructions: Direct your comments to
Docket ID No. EPA–HQ–OW–2011–
0188. EPA’s policy is that all comments
received will be included in the public
docket without change and could be
made available online at
www.regulations.gov, including any
personal information provided, unless
the comment includes information
claimed to be Confidential Business
Information (CBI) or other information
whose disclosure is restricted by statute.
Do not submit information that you
consider to be CBI or otherwise
protected through www.regulations.gov
or email. The www.regulations.gov Web
site is an ‘‘anonymous access’’ system,
which means that EPA will not know
your identity or contact information
unless you provide it in the body of
your comment. If you send an email
comment directly to EPA without going
through www.regulations.gov your email
address will be automatically captured
and included as part of the comment
that is placed in the public docket and
made available on the Internet. If you
submit an electronic comment, EPA
recommends that you include your
name and other contact information in
the body of your comment and with any
disk or CD–ROM you submit. If EPA
cannot read your comment because of
technical difficulties and cannot contact
you for clarification, EPA might not be
able to consider your comment.
Electronic files should avoid the use of
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]]>Agencies
[Federal Register Volume 76, Number 243 (Monday, December 19, 2011)]
[Proposed Rules]
[Pages 78594-78599]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32254]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-130302-10]
RIN 1545-BJ69
Reporting of Specified Foreign Financial Assets
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking by cross-reference to temporary
regulations.
-----------------------------------------------------------------------
SUMMARY: In the Rules and Regulations section of this issue of the
Federal Register, the Internal Revenue Service is issuing temporary
regulations relating to the requirement that individuals attach a
statement to their income tax return to provide required information
regarding foreign financial assets in which they have an interest. The
text of the temporary regulations also serves as the text of these
proposed regulations. This notice of proposed rulemaking also includes
a proposed regulation setting forth requirements for certain domestic
entities to report foreign financial assets in the same manner as an
individual.
DATES: Written or electronic comments and requests for a public hearing
must be received by March 19, 2012. Comments on the collection of
information should be received by February 17, 2012.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-130302-10), Room
5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
130302-10), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC., or sent electronically, via the Federal
eRulemaking Portal at https://www.regulations.gov (IRS REG-130302-10).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Joseph S. Henderson, (202) 622-3880; concerning submission of comments
and/or requests for a hearing, Richard.A. Hurst@irscounsel.treas.gov,
(202) 622-7180 (not a toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP,
Washington, DC 20224. Comments on the collection of information should
be received by February 17, 2012. Comments are specifically requested
concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance and purchase of service to provide information.
The collection of information in these proposed regulations is in
Sec. Sec. 1.6038D-2 and 1.6038D-4. The collection of information is
mandatory with respect to a specified person that has an interest in
specified foreign financial assets and the value of those assets is
more than the applicable reporting threshold. The respondents are U.S.
citizens, U.S. residents, certain nonresidents and, to the extent
provided in future regulations, certain domestic entities. The
collection of information is satisfied by filing Form 8938, ``Statement
of Specified Foreign Financial Assets,'' OMB No. 1545-2195, with the
respondent's income tax return.
Estimated total annual reporting burden: 378,000 hours.
Estimated annual burden per respondent: 1 hour and 5 minutes.
[[Page 78595]]
Estimated number of respondents: 350,000.
Estimated annual frequency of responses: once.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential as required by 26 U.S.C. 6103.
Background
Section 6038D was enacted by section 511 of the Hiring Incentives
to Restore Employment (HIRE) Act, Public Law 111-147 (124 Stat. 71).
Section 6038D(a) requires an individual who holds any interest in a
specified foreign financial asset during the taxable year to attach a
statement to that individual's return of tax imposed by subtitle A of
the Internal Revenue Code (Code) to report the information identified
in section 6038D(c), if the aggregate value of the specified foreign
financial assets in which the individual holds an interest exceeds
$50,000 for the taxable year, or such higher dollar amount as the
Secretary may prescribe.
Section 6038D(f) provides that, to the extent provided by the
Secretary in regulations or other guidance, section 6038D shall apply
to any domestic entity which is formed of availed of for purposes of
holding, directly or indirectly, specified foreign financial assets, in
the same manner as if the entity were an individual.
Temporary regulations in the Rules and Regulations section of this
issue of the Federal Register contain amendments to the Income Tax
Regulations (26 CFR part 1) providing guidance to individuals required
to report specified foreign financial assets with their annual return
pursuant to section 6038D of the Code. The text of those regulations
also serves as the text of the regulations contained in this document
that are proposed by cross-reference to the temporary regulations, that
is Sec. Sec. 1.6038D-0 through 1.6038D-5, Sec. 1.6038D-7, and Sec.
1.6038D-8. The preamble to the temporary regulations explains the
amendments added by the temporary regulations.
This document also contains a proposed amendment to the Income Tax
Regulations (26 CFR part 1) that sets out the conditions under which a
domestic entity will be considered a ``specified domestic entity.'' A
domestic entity that is a specified domestic entity pursuant to Prop.
Reg. Sec. 1.6038D-6 is required to report specified foreign financial
assets in which it holds an interest.
Explanation of Provisions
1. Application of Section 6038D to Domestic Entities
Under the proposed regulations, domestic entities that are subject
to the reporting requirements of section 6038D are designated as
specified domestic entities and include certain domestic corporations,
domestic partnerships, and trusts described in section 7701(a)(30)(E),
generally referred to as domestic trusts for purposes of this
explanation. Specified domestic entities do not include domestic
estates.
A. Domestic Corporations and Partnerships
For a domestic corporation or partnership to be considered a
specified domestic entity, it must satisfy three conditions. First, the
domestic corporation or domestic partnership must have an interest in
specified foreign financial assets (other than assets excepted from
reporting as provided in Sec. 1.6038D-7T) with an aggregate value
exceeding the reporting threshold in Sec. 1.6038D-2T(a)(1). Second, it
must be closely held by a specified individual (as defined in Sec.
1.6038D-1T(a)(2)). A domestic corporation is closely held if a
specified individual owns at least 80 percent of the corporation's
stock (by vote or value) on the last day of the corporation's taxable
year. A domestic partnership is closely held if a specified individual
owns at least 80 percent of the capital or profits interest in the
partnership on the last day of its taxable year. Direct, indirect, and
constructive ownership rules apply in determining whether the
corporation or partnership is closely held for this purpose.
Finally, a domestic corporation or partnership must also meet
either of the following two conditions:
(A) At least 50 percent of the corporation's or partnership's gross
income for the taxable year is passive income or at least 50 percent of
the assets held by the corporation or partnership at any time during
the taxable year are assets that produce or are held for the production
of passive income; or
(B) At least 10 percent of the corporation's or partnership's gross
income for the taxable year is passive income or at least 10 percent of
the assets held by the corporation or partnership at any time during
the taxable year are assets that produce or are held for the production
of passive income, and the corporation or partnership is formed or
availed of by a specified individual with a principal purpose of
avoiding the reporting obligations under section 6038D. The
determination of whether a corporation or partnership is formed or
availed of with a principal purpose of avoiding reporting under section
6038D takes into account all facts and circumstances.
Two different aggregation rules apply for purposes of determining
whether a domestic corporation or domestic partnership is a specified
domestic entity. First, in determining whether a domestic corporation
or domestic partnership meets the reporting thresholds in Sec.
1.6038D-2T(a)(1), domestic corporations and domestic partnerships that
are closely held by the same specified individual are treated as a
single entity. Second, for purposes of determining whether a
corporation or partnership meets the passive income or asset test,
domestic corporations and domestic partnerships that are closely held
by the same individual and that are connected through stock or
partnership interest ownership with a common parent corporation or
partnership are treated as a single entity.
The determination of whether a corporation or partnership is a
specified domestic entity is made annually for each taxable year of
such corporation or partnership.
B. Domestic Trusts
A domestic trust is considered a specified domestic entity if it
has an interest in specified foreign financial assets (other than
assets excepted from reporting as provided in Sec. 1.6038D-7T) with an
aggregate value exceeding the reporting threshold in Sec. 1.6038D-
2T(a)(1) and one or more specified persons as current beneficiaries.
For purposes of section 6038D, a current beneficiary is any person who,
during the taxable year, is entitled to, or at the discretion of any
person may receive, a distribution from the principal or income of the
trust (determined without regard to any power of appointment to the
extent that such power remains unexercised at the end of the taxable
year). As discussed in section 2 of this explanation, certain domestic
trusts are not specified domestic entities.
The determination of whether a domestic trust is a specified
domestic entity is made annually for each taxable year of such trust.
2. Excepted Specified Domestic Entities
A domestic entity is not considered to be a specified domestic
entity if it is
[[Page 78596]]
described in section 1473(3) and the regulations as excepted from the
definition of the term ``specified United States person''. This
exception does not apply to any trust that is exempt from tax under
section 664(c).
A domestic trust is not considered a specified domestic entity if
the trustee or executor is a bank, financial institution, or domestic
corporation that is subject to certain examination, oversight or
registration requirements, has supervisory authority over or fiduciary
obligations with regard to the trust's specified foreign financial
assets, and files income tax returns and information returns on behalf
of the trust. In addition, a domestic trust or any portion of the trust
that is treated as owned by one or more specified persons under
sections 671 through 679 and the regulations issued under those
sections is not considered to be a specified domestic entity.
Proposed Effective Date
Section 1.6083D-6 is proposed to apply to taxable years beginning
after December 31, 2011.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations.
It is hereby certified that the collection of information in this
notice of proposed rulemaking will not have a significant economic
impact on a substantial number of small entities within the meaning of
section 601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6).
Small entities generally hold specified foreign financial assets (that
is, financial accounts, stocks, securities, financial instruments,
contracts, or interests in foreign entities) for use in their trade or
business and therefore generally would not have a filing requirement.
The burden is further reduced because small entities that do hold
specified foreign financial assets generally will be excepted from
reporting such assets under these proposed rules if the assets are
reported on one or more of the following forms: Form 3520, ``Annual
Return To Report Transactions With Foreign Trusts and Receipt of
Certain Foreign Gifts``; Form 3520-A, ``Annual Information Return of
Foreign Trust With a U.S. Owner''; Form 5471, ``Information Return of
U.S. Persons With Respect To Certain Foreign Corporations''; Form 8621,
``Return by a Shareholder of a Passive Foreign Investment Company or a
Qualified Electing Fund''; Form 8865, ``Return of U.S. Persons With
Respect to Certain Foreign Partnerships''; or Form 8891, ``U.S.
Information Return for Beneficiaries of Certain Canadian Registered
Retirement Plans.'' Therefore, a Regulatory Flexibility Analysis under
the Regulatory Flexibility Act is not required. Pursuant to section
7805(f) of the Code, this regulation has been submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small businesses. The Internal Revenue Service invites
the public to comment on this certification.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
IRS. The Department of the Treasury and the Internal Revenue Service
request comments on all aspects of the proposed regulations. All
comments will be available for public inspection and copying. A public
hearing will be scheduled if requested in writing by any person that
timely submits written comments. If a public hearing is scheduled,
notice of the date, time, and place for the public hearing will be
published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Joseph S.
Henderson, Office of Associate Chief Counsel (International). However,
other personnel from the Internal Revenue Service and the Department of
the Treasury participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.6038D-1 also issued under 26 U.S.C. 6038D
Section 1.6038D-2 also issued under 26 U.S.C. 6038D
Section 1.6038D-3 also issued under 26 U.S.C. 6038D
Section 1.6038D-4 also issued under 26 U.S.C. 6038D
Section 1.6038D-5 also issued under 26 U.S.C. 6038D
Section 1.6038D-6 also issued under 26 U.S.C. 6038D
Section 1.6038D-7 also issued under 26 U.S.C. 6038D
Section 1.6038D-8 also issued under 26 U.S.C. 6038D* * *
Par. 2. Section 1.6038D-0 is added to read as follows:
Sec. 1.6038D-0 Outline of regulation provisions.
The text of proposed Sec. 1.6038D-0 is the same as the text of
Sec. 1.6038D-0T published elsewhere in this issue of the Federal
Register.
Par. 3. Section 1.6038D-1 is added to read as follows:
Sec. 1.6038D-1 Reporting with respect to specified foreign financial
assets, definition of terms.
The text of proposed Sec. 1.6038D-1 is the same as the text of
paragraphs (a) and (b) in Sec. 1.6038D-1T published elsewhere in this
issue of the Federal Register.
Par. 4 Section 1.6038D-2 is added to read as follows:
Sec. 1.6038D-2 Requirement to report specified foreign financial
assets.
The text of proposed Sec. 1.6038D-2 is the same as the text of
paragraphs (a) through (e) in Sec. 1.6038D-2T published elsewhere in
this issue of the Federal Register.
Par. 5 Section 1.6038D-3 is added to read as follows:
Sec. 1.6038D-3 Specified foreign financial assets.
The text of proposed Sec. 1.6038D-3 is the same as the text of
paragraphs (a) through (e) in Sec. 1.6038D-3T published elsewhere in
this issue of the Federal Register.
Par. 6. Section 1.6038D-4 is added to read as follows:
Sec. 1.6038D-4 Information required to be reported.
The text of proposed Sec. 1.6038D-4 is the same as the text of
paragraphs (a) and (b) in Sec. 1.6038D-4T published elsewhere in this
issue of the Federal Register.
Par. 7. Section 1.6038D-5 is added to read as follows:
Sec. 1.6038D-5 Valuation guidelines.
The text of proposed Sec. 1.6038D-5 is the same as the text of
paragraphs (a) through (g) in Sec. 1.6038D-5T published
[[Page 78597]]
elsewhere in this issue of the Federal Register.
Par. 8. Section 1.6038D-6 is added to read as follows:
Sec. 1.6038D-6 Specified domestic entities.
(a) Specified domestic entity. A specified domestic entity is a
domestic corporation, a domestic partnership, or a trust described in
section 7701(a)(30)(E), if such corporation, partnership, or trust is
formed or availed of for purposes of holding, directly or indirectly,
specified foreign financial assets. Whether a domestic corporation, a
domestic partnership, or a trust described in section 7701(a)(30)(E) is
a specified domestic entity is determined annually.
(b) Corporations and partnerships--(1) Formed or availed of. Except
as otherwise provided in paragraph (d) of this section, a domestic
corporation or a domestic partnership is formed or availed of for
purposes of holding, directly or indirectly, specified foreign
financial assets if and only if--
(i) The corporation or partnership has an interest in specified
foreign financial assets (other than assets excepted from reporting as
provided in Sec. 1.6038D-7T) with an aggregate value exceeding the
reporting threshold in Sec. 1.6038D-2T(a)(1);
(ii) The corporation or partnership is closely held by a specified
individual as determined under paragraph (b)(3) of this section; and
(iii) One of the following two conditions is satisfied:
(A) At least 50 percent of the corporation's or partnership's gross
income for the taxable year is passive income or at least 50 percent of
the assets held by the corporation or partnership at any time during
the taxable year are assets that produce or are held for the production
of passive income; or
(B)(1) At least 10 percent of the corporation's or partnership's
gross income for the taxable year is passive income or at least 10
percent of the assets held by the corporation or partnership at any
time during the taxable year are assets that produce or are held for
the production of passive income, and
(2) The corporation or partnership is formed or availed of by the
specified individual identified in paragraphs (b)(1)(ii) and (b)(3) of
this section with a principal purpose of avoiding the reporting
obligations under section 6038D. For purposes of determining whether a
corporation or partnership is formed or availed of with a principal
purpose of avoiding reporting under section 6038D, all facts and
circumstances are taken into account.
(2) Passive income. For purposes of paragraph (b) of this section,
passive income means the portion of gross income that consists of--
(i) Dividends;
(ii) Interest;
(iii) Rents and royalties, other than rents and royalties derived
in the active conduct of a trade or business conducted by employees of
the corporation or partnership;
(iv) Annuities;
(v) The excess of gains over losses from the sale or exchange of
property that gives rise to passive income described in paragraphs
(b)(2)(i) through (iv) of this section;
(vi) The excess of gains over losses from transactions (including
futures, forward, and similar transactions) in any commodity, but not
including any commodity hedging transaction described in section
954(c)(5)(A) determined by treating the corporation or partnership as a
controlled foreign corporation;
(vii) The excess of foreign currency gains over foreign currency
losses (as defined in section 988(b)) attributable to any section 988
transaction; and
(viii) Net income from notional principal contracts.
(3) Closely held--(i) Domestic corporation. A domestic corporation
is closely held by a specified individual for purposes of paragraph
(b)(1)(ii) of this section if at least 80 percent of the total combined
voting power of all classes of stock of the corporation entitled to
vote, or at least 80 percent of the total value of the stock of the
corporation, is owned, directly, indirectly, or constructively, by one
specified individual on the last day of the corporation's taxable year.
(ii) Domestic partnership. A partnership is closely held by a
specified individual for purposes of paragraph (b)(1)(ii) of this
section if at least 80 percent of the capital or profits interest in
the partnership is held, directly, indirectly, or constructively, by
one specified individual on the last day of the partnership's taxable
year.
(iii) Constructive ownership. For purposes of paragraphs (b)(1)(ii)
and (b)(3) of this section, section 267(c) and (e)(3) apply for the
purpose of determining the interest of a specified individual in a
corporation or partnership, except that section 267(c)(4) is applied as
if the family of an individual includes the spouses of the individual's
family members.
(iv) Example. The following example illustrates the application of
paragraph (b)(3) of this section:
Example. (1) Facts. DC1 is a domestic corporation the total
value of the stock of which is owned 60% by A, a specified
individual, 30% by B, a member of A's family for purposes of section
267(c)(2) who is not a specified individual, and 10% by FC1, a
foreign corporation. DC1 owns 90% of the total value of the stock of
DC2, a domestic corporation. FC2, a foreign corporation, owns 10% of
DC2. Neither A nor B owns, directly, indirectly, or constructively,
any stock in FC1 or FC2.
(2) Ownership determination. DC2 is closely held by A within the
meaning of paragraphs (b)(1)(ii) and (b)(3) of this section because
A, a specified person, owns more than 80% of its total value. A is
considered to own 81% of the total value of DC2 by application of
the rules of section 267(c) and this section.
(4) Treatment of related corporations and partnerships--(i)
Determination of reporting threshold. For purposes of applying
paragraph (b)(1)(i) of this section and determining whether a domestic
corporation or domestic partnership satisfies the reporting threshold
in Sec. 1.6038D-2T(a)(1), all domestic corporations and domestic
partnerships that have an interest in any specified foreign financial
asset and are closely held by the same specified individual as
determined under paragraphs (b)(1)(ii) and (b)(3) of this section are
treated as a single entity, and each such related corporation or
partnership will be treated as owning the specified foreign financial
assets held by all such related corporations or partnerships.
(ii) Determination of passive income and asset thresholds. For
purposes of applying the passive income and asset thresholds of
paragraph (b)(1)(iii) of this section, all domestic corporations and
domestic partnerships that are closely held by the same specified
individual as determined under paragraphs (b)(1)(ii) and (b)(3) of this
section and that are connected through stock or partnership interest
ownership with a common parent corporation or partnership (as
determined under this paragraph (b)(4)(ii)) are treated as a single
entity. A domestic corporation or a domestic partnership is considered
connected through stock or partnership interest ownership with a common
parent corporation or partnership if stock representing at least 80
percent of the voting power or value of each such corporation, or
partnership interests representing at least 80 percent of the profits
interests or capital interests of the partnership, in each case other
than stock of or partnership interests in the common parent, is owned
by one or more of the other connected corporations, connected
partnerships, or the common parent. For purposes of
[[Page 78598]]
applying paragraph (b)(1)(iii) of this section, each member of a
closely held and connected group as determined under this paragraph
(b)(4)(ii) is treated as owning the combined assets and receiving the
combined income of all members of that group. For purposes of the
preceding sentence, any contract, equity, or debt existing between
members of such a group, as well as any items arising under or from
such contract, equity, or debt relevant to the determination of the
passive income percentage under paragraph (b) of this section, are
eliminated.
(5) Examples. The following examples illustrate the application of
the rules of paragraph (b) of this section:
Example 1. (1) Facts. L is a specified individual. In Year X, L
wholly owns DC1, a domestic corporation, and also owns a 90% capital
interest in DP, a domestic partnership. DC1 owns 80% of the sole
class of stock of DC2, a domestic corporation. DC1 has no assets
other than its interest in DC2. DC2's only assets are assets that
produce passive income, with a maximum value in Year X of $40,000 on
October 12. DC2's assets are comprised in relevant part on October
12, Year X, of $15,000 of specified foreign financial assets. DP's
only assets are assets that produce passive income and that are
specified foreign financial assets with a maximum value of $90,000
on October 12, Year X and have a value of $20,000 on December 31,
Year X. DC1 and DC2 do not file a consolidated annual return.
(2) Determination of reporting threshold. DC1, DC2, and DP are
closely held by L for purposes of applying paragraph (b)(1)(ii) and
(b)(3) of this section. Under Sec. 1.6038D-3T, DC2 and DP each has
an interest in specified foreign financial assets; DC1 does not have
an interest in specified foreign financial assets. For purposes of
applying paragraph (b)(1)(i) of this section and Sec. 1.6038D-
2T(a)(1)--
(i) DC1. DC1 is not treated as a single entity with DC2 and DP
under paragraph (b)(4)(i) of this section. As a result, DC1 does not
satisfy the reporting threshold of paragraph (b)(1)(i) of this
section; and
(ii) DC2 and DP. DC2 and DP are treated as a single entity under
paragraph (b)(4)(i) of this section. Therefore, for purposes of
applying the reporting threshold of Sec. 1.6038D-2T(a)(1), DC2 is
considered as owning in addition to its own assets the assets of DP,
and DP is considered as owning in addition to its own assets the
assets of DC2. As a result, DC2 and DP each satisfies the reporting
threshold of Sec. 1.6038D-2T(a)(1), because the value of the
specified foreign financial assets each is considered as owning
under paragraph (b)(4)(i) of this section exceeds $100,000 on
October 12, Year X.
(3) Determination of passive income or passive asset
percentage--(i) DC1 and DC2. DC1 and DC2 are treated as members of a
closely held and connected group of entities under paragraph
(b)(4)(ii) of this section, because DC1 and DC2 are closely held by
L, and DC2 is connected with DC1 though DC1's ownership of stock of
DC2 representing at least 80% of the voting power or value of DC2.
As a result, DC1 and DC2 are considered a single entity for purposes
of applying paragraph (b)(1)(iii) of this paragraph, and each of DC1
and DC2 is considered as owning the combined assets, and receiving
the combined income, of both DC1 and DC2 (under paragraph (b)(4)(ii)
of this section). Therefore, DC1 and DC2 each satisfies the passive
asset threshold of paragraph (b)(1)(iii)(A) of this section.
(ii) DP. DP is not treated as a member of the DC1 and DC2
closely held and connected group of entities because DC1 and DP are
not owned by a common parent corporation or partnership. Therefore,
whether the passive income or passive asset threshold of paragraph
(b)(1)(iii) of this section is met with respect to DP is determined
solely by reference to DP's separately earned passive income and
separately held passive assets. DP has only passive assets on
October 12, Year X, and, therefore, satisfies paragraph
(b)(1)(iii)(A) of this section.
(4) Reporting requirements--(i) DC1. DC1 is not a specified
domestic entity for Year X, and is not required to file Form 8938,
because DC1 does not satisfy the reporting threshold of paragraph
(b)(1)(i) of this section and Sec. 1.6038D-2T(a)(1).
(ii) DC2 and DP. DC2 and DP are specified domestic entities for
Year X, because they each meet the conditions of paragraph (b)(1) of
this section: Each is closely held by L, a specified individual;
each has an interest in specified foreign financial assets with an
aggregate value exceeding the reporting threshold of Sec. 1.6038D-
2T(a)(1); and each satisfies the passive asset threshold. DC2 and DP
must each file Form 8938 for Year X to report their respective
specified foreign financial assets and disclose their maximum values
as provided in Sec. 1.6038D-4T.
Example 2. (1) Facts. The facts are the same as in Example 1,
except that DC2 also has assets and income from a trade or business.
The income from such business is not passive income and constitutes
60% of the gross income generated by DC2 in Year X. The assets
attributable to such trade or business constitute at least 60% of
the value of DC2's assets at all times during Year X. Assume that
neither DC1 nor DC2 is formed or availed of by L with a principal
purpose of avoiding the reporting obligations under section 6038D.
(2) Determination of reporting threshold. DC1, DC2, and DP are
closely held by L for purposes of applying paragraph (b)(1)(ii) and
(b)(3) of this section. Under Sec. 1.6038D-3T, DC2 and DP each has
an interest in specified foreign financial assets; DC1 does not have
an interest in specified foreign financial assets. For purposes of
applying paragraph (b)(1)(i) of this section and Sec. 1.6038D-
2T(a)(1)--
(i) DC1. DC1 is not treated as a single entity with DC2 and DP
under paragraph (b)(4)(i) of this section. As a result, DC1 does not
satisfy the reporting threshold of paragraph (b)(1)(i) of this
section; and
(ii) DC2 and DP. DC2 and DP are treated as a single entity under
paragraph (b)(4)(i) of this section. Therefore, for purposes of
applying the reporting threshold of Sec. 1.6038D-2T(a)(1), DC2 is
considered as owning in addition to its own assets the assets of DP,
and DP is considered as owning in addition to its own assets the
assets of DC2. As a result, DC2 and DP each satisfies the reporting
threshold of Sec. 1.6038D-2T(a)(1) because the value of the
specified foreign financial assets each is considered as owning
under paragraph (b)(4)(i) of this section exceeds $100,000 on
October 12, Year X.
(3) Determination of passive income or passive asset
percentage--(i) DC1 and DC2. DC1 and DC2 are treated as members of a
closely held and connected group of entities under paragraph
(b)(4)(ii) of this section, because DC1 and DC2 are closely held by
L, and DC2 is connected with DC1 though DC1's ownership of stock of
DC2 representing at least 80% of the voting power or value of DC2.
As a result, DC1 and DC2 are considered a single entity for purposes
of applying paragraph (b)(1)(iii) of this paragraph, and each of DC1
and DC2 is considered as owning the combined assets, and receiving
the combined income, of both DC1 and DC2 (as determined under
paragraph (b)(4)(ii) of this section). DC1 and DC2 do not have
sufficient passive income or passive assets to satisfy the
thresholds of paragraph (b)(1)(iii)(A) of this section. In addition,
because neither DC1 nor DC2 is formed or availed of by L with a
principal purpose of avoiding the reporting obligations under
section 6038D, neither DC1 nor DC2 meets the conditions described in
paragraph (b)(1)(iii)(B) of this section.
(ii) DP. DP is not treated as a member of the DC1 and DC2
closely held and connected group of entities, because DC1 and DP are
not owned by a common parent corporation or partnership. Therefore,
whether the passive income or asset threshold of paragraph
(b)(1)(iii) of this section is met with respect to DP is determined
solely by reference to DP's separately earned passive income and
separately held passive assets. DP has only passive assets that are
specified foreign financial assets on October 12, Year X, and
satisfies paragraph (b)(1)(iii)(A) of this section.
(4) Reporting requirements--(i) DC1. DC1 is not a specified
domestic entity for Year X, and is not required to file Form 8938,
because DC1 does not satisfy the reporting threshold of paragraph
(b)(1)(i) of this section and Sec. 1.6038D-2T(a)(1).
(ii) DC2. DC2 is not a specified domestic entity for Year X, and
is not required to file Form 8938, because DC2 does not satisfy the
passive income or passive asset threshold of paragraph
(b)(1)(iii)(A) of this section and is not formed or availed of with
a principal purpose of avoiding the reporting obligations under
section 6038D.
(iii) DP. DP is a specified domestic entity for Year X because
DP meets the conditions of paragraph (b)(1) of this section: DP is
closely held by L, a specified individual; DP has an interest in
specified foreign financial assets with an aggregate value exceeding
the reporting threshold of Sec. 1.6038D-2T(a)(1); and DP satisfies
the passive asset threshold of paragraph (b)(1)(iii)(A) of this
section. DP must file Form 8938 for Year X to report its specified
foreign financial assets and disclose their maximum value as
provided in Sec. 1.6038D-4T.
(c) Domestic trusts. Except as provided in paragraph (d) of this
[[Page 78599]]
section, a trust described in section 7701(a)(30)(E) is a specified
domestic entity that is formed or availed of for purposes of holding,
directly or indirectly, specified foreign financial assets if and only
if the trust--
(1) Has an interest in specified foreign financial assets (other
than assets excepted from reporting as provided in Sec. 1.6038D-7T)
with an aggregate value exceeding the reporting threshold in Sec.
1.6038D-2T(a)(1), and
(2) Has one or more specified persons as a current beneficiary. For
purposes of this paragraph (c)(2), the term current beneficiary means,
with respect to the taxable year, any person who at any time during
such taxable year is entitled to, or at the discretion of any person
may receive, a distribution from the principal or income of the trust
(determined without regard to any power of appointment to the extent
that such power remains unexercised at the end of the taxable year).
(d) Excepted domestic entities. An entity is not considered to be a
specified domestic entity if the entity is--
(1) Certain persons described in section 1473(3). An entity, except
for a trust that is exempt from tax under section 664(c), that is
excepted from the definition of the term ``specified United States
person'' under section 1473(3) and the regulations issued under that
section;
(2) Certain domestic trusts. A trust described in section
7701(a)(30)(E) provided that the trustee of the trust--
(i) Has supervisory authority over or fiduciary obligations with
regard to the specified foreign financial assets held by the trust;
(ii) Timely files (including any applicable extensions) annual
returns and information returns on behalf of the trust; and
(iii) Is --
(A) A bank that is examined by the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, or the National Credit Union Association;
(B) A financial institution that is registered with and regulated
or examined by the Securities and Exchange Commission; or
(C) A domestic corporation described in section 1473(3)(A) or (B),
and the regulations issued under that section.
(3) Domestic trusts owned by one or more specified persons. A trust
described in section 7701(a)(30)(E) to the extent such trust or any
portion thereof is treated as owned by one or more specified persons
under sections 671 through 679 and the regulations issued under those
sections.
(e) Effective/applicability dates. This section applies to taxable
years beginning after December 31, 2011.
Par. 9. Section 1.6038D-7 is added to read as follows:
Sec. 1.6038D-7 Exceptions from the reporting of certain assets under
Section 6038D.
The text of proposed Sec. 1.6038D-7 is the same as the text of
paragraphs (a) through (d) in Sec. 1.6038D-7T published elsewhere in
this issue of the Federal Register.
Par. 10. Section 1.6038D-8 is added to read as follows:
Sec. 1.6038D-8 Penalties for failure to disclose.
The text of proposed Sec. 1.6038D-8 is the same as the text of
paragraphs (a) through (g) in Sec. 1.6038D-8T published elsewhere in
this issue of the Federal Register.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2011-32254 Filed 12-14-11; 4:15 pm]
BILLING CODE 4830-01-P
